Feb 24, 2015

Phoning It In

By Kellogg Insight | Based on the insights of James Shein

When RadioShack announced this month that it was filing for bankruptcy, not everyone was shocked by the news. Although it was once a leading electronics chain with thousands of outlets across the country, the rise of Best Buy and Amazon seemed to have already sealed the company’s fate. As far back as 2011, the satirical newspaper The Onion ran a characteristically damning headline: “Even CEO Can’t Figure Out How RadioShack Is Still In Business.”

From a strategist’s point of view, however, its downfall was not inevitable—the company simply failed to make the necessary changes to stay relevant. James Shein, a clinical professor of strategy at the Kellogg School and author of Reversing the Slide: A Strategic Guide to Turnarounds and Corporate Renewal, says that when companies like RadioShack go bankrupt, it is usually because they never took a fresh look at their own fundamentals.

“Basically, what happened is they let the world go around them,” Shein says. “The funny thing is, they were first with so many things—small computers, some of the phones, a lot of popular gadgetry. Then they just let everybody pass them by.”

Complacency is a well-known hazard for companies that become household names. Borders was mostly caught off guard when Amazon stole its market share; the bookstore chain did little to change. And when Netflix launched, it took Blockbuster years to respond with its own mail-order video service. Neither company was quick enough to revise its core strategy. “We’ve seen RadioShack stumble in the same way,” he says.

For Shein, RadioShack’s late-stage efforts to cut costs and boost earnings were doomed to fail in the absence of a broader strategic vision. The larger problem was the company’s inability to define its competitive advantage. “When you’re setting strategy, you’re looking for a competitive advantage. Without it, you’re in trouble.”

Lack of competitive advantage leads to poor, haphazard strategic moves—for example, Blockbuster’s decision to merge with Circuit City at a time when both companies were struggling. “My analogy,” Shein says, “is two drunks staggering down the road who find themselves leaning against each other and think they’re doing fine.” It also leads to denial about one’s place among the competition. “When Montgomery Ward said ‘our niche is between JC Penney and Sears,’” Shein says, “that was it—I knew they were done. There’s not a lot of room there.”

How can companies avoid this fate? First, it is important to define core competencies, and then to ask: Are any of these competitive advantages? A company might do something extremely well; the question is whether it does it better than anyone else in the market. When it comes to determining strategy, Shein says, it is important not to confuse competitive advantage with competitive necessity.

“Sears might say to itself, ‘we have stores all over the place, and we have a broad array of merchandise!’” Shein says. “Neither of those are competitive advantages—those were competitive necessities if you were going to be in the retail business years ago. Pharma is another example. Ask most pharmaceutical executives what their competitive advantage is, and they’ll say, ‘we have FDA-approved plants, we have patents, and we have great scientists.’ But those are competitive necessities, not competitive advantages.”

It is not always easy for companies to redefine their competitive advantage—and it is harder the bigger they get. Still, some have succeeded. YouTube, now the second biggest search program outside of Google Search, started as a video dating service before discovering it had no competitive advantage in that market. J. Crew, under pressure from the private equity firm that owned it, switched to cheaper materials, but then reversed course when it realized it was throwing away the major advantage it had established over time: its high-quality clothing.

RadioShack offers a classic example of what not to do in a turnaround. Instead of identifying a clear go-to-market strategy, it focused entirely on operational changes in the name of cost cutting. Cuts are worth pursuing, especially if a company is in crisis mode and wants to stop the bleeding quickly. Sometimes it helps to strip out assets that no longer support a core competency, thereby rationalizing the balance sheet and improving the company’s short-term financial position. But unless a company defines its core competencies—and then determines which are competitive advantages—it may have difficulty determining which assets to strip and what kinds of people it needs.

As Shein sees it, that is what happened to RadioShack. “You need to have a competitive strategy and implement it,” he says, “and I didn’t see one in what they were doing.”